Inflation could be the story of the week—if it’s not a big IPO. Investors will get another look at how the conflict with Iran is hitting prices when the Consumer Price Index report for May arrives Wednesday. The CPI jumped 3.8% year-over-year in April, the largest annual rise in nearly three years, with gas prices up more than 28%. The war with Iran has largely sealed off the Strait of Hormuz, typically used to ship 20% of the world’s oil, fertilizer, and other resources. “Core” inflation, which excludes the volatile food and energy categories, rose 2.8% year-over-year, suggesting that oil and gas inflation is spreading to other segments of the economy. The Producer Price Index, which tracks wholesale prices, rose 6% year-over-year in April. And the Personal Consumption Expenditures price index, which tracks money spent by and on behalf of households, rose 3.8% year-over-year in April. Inflation influences how the Fed sets interest rates, which impacts borrowing rates for everything from buying a home to paying off credit cards. Cost-of-living increases are particularly burdensome for working-class households, since prices tend to accelerate fastest for low-cost versions of goods.)
Investors will also be on the lookout for developments in the tech sector. Adobe is slated to report results, and Apple to hype up new releases. And then there’s SpaceX. The Elon Musk-led company has filed paperwork indicating that its IPO could raise $75 billion and put its valuation at $1.75 trillion. The IPO could happen as soon as this week and, eventually, be followed by the listing of two other billion-dollar companies: Anthropic and OpenAI.
What analysts are saying about U.S. stocks
Morgan Stanley: “While Friday’s positioning-driven sell-off was notable, earnings and macro data remain strong and supportive of broader participation over the coming months. Rates and rate volatility remain a near-term risk, contingent on inflation data as well as Fed and Treasury liquidity provisioning.”
JPMorgan: “At the overall equity level, we continue to recommend using the dips caused by adverse geopolitical news to add into, but we also advised two weeks ago to start looking at Low Vol part of the market—see report. We argued that this group of stocks is likely to find support irrespective of where bond yields go from here, i.e., even if they move up. Further into the 2nd half, the wildcards for more market gains are the prospect of a turn dovish by the Fed, something which is right now clearly very much out of consensus; materially lower oil prices by this time next year; and potential green shoots in China.”
Goldman Sachs: “Speculative mania is a poor timing indicator but one of the dynamics that has characterized the peaks of high-valuation, high-concentration bull markets in the past. Other dynamics that have marked the ends of similar bull markets in the past include disappointing growth, extremely elevated equity issuance, and tightening Fed policy. None of these conditions describe the environment today, but each appears closer than it did just a few months ago.”
RBC Capital Markets: “We think the P/E is the channel through which equities are most likely to feel the adverse impacts of higher rates (and inflation), but that up to a certain point this can be offset by the strong outlook for earnings, powered by the AI theme, in the year ahead. We also believe that as long as 10-year yields don’t break out of their post-2022 range, a move could be tolerated by the U.S. equity market longer term but with some short-term indigestion. Our longer-term historical analysis also suggests that the U.S. equity market can continue to move up over the next 12 months even if a few modest hikes occur, but that a more significant hiking cycle would be challenging.”
Evercore ISI: “Momentum off the 3/30 low has been record-breaking. A hedge unwind coupled with strong index earnings has seen ~2.5% weight of the Russell 3000 rise 100%+ from recent 2-month lows—an amount bested only by the GFC recovery and Dot Com peak. Dreams of trillion-dollar valuations amidst the biggest semiconductor price hike in history are becoming the norm. Margin debt has surged; equities account for the largest share of household assets on record. Animal spirits have surged.”